The failures of Mriya, Creative and UkrLandFarming agroholdings to pay their debts have made some lenders wary of the sector.
Ukraine’s agricultural sector is one of the big engines driving the economy, but creditors contended with all sorts of calamities in the last three years – revolution, war, economic recession, high inflation and currency devaluation.
These factors, along with parlaiment’s refusal to lift the moratorium on sales of agricultural land, have clouded financing prospects. Without land as collateral, the 10 largest Ukrainian agroholdings, which control 2.1 million hectares of land, have had to turn to other sources of fi nancing.
Mriya default
Mriya, the Ternopil-based agroholding that controls 180,000 hectares of land in western Ukraine, highlights the troubles. The company went public on the Frankfurt Stock Exchange in 2008. In August 2014, it defaulted to creditors. The previous owners, the Huta family, are suspected of siphoning the money abroad through a network of offshore firms – the alleged scheme came to light in the Panama Papers scandal in April. The Hutas fled Ukraine, leaving Mriya with $1.3 billion in debt.
Since then, the new management appointed by Mriya’s creditors and bondholders has been trying to preserve the agroholding, repay the debt and return the assets illegally seized by the Huta family. In September, they approved the conditions for restructuring its debt of $1.1 billion to $330 million.
On Dec. 16, the Ternopil Economic Court satisfied a claim by BNY Mellon Corporate Trustee Services Ltd., which represents the interests of eurobond holders. They sought the recovery of $573 million worth overdue obligations from 68 Mriya group subsidiary companies registered in Cyprus that operate in Ukraine and acted as sureties for the bonds issued in 2011 and 2013 by Mriya Agroholding Plc.
Simon Cherniavsky, CEO of Mriya, told the Kyiv Post that this lawsuit was crucial for Ukraine since it was the first time eurobond holders had claimed their rights in Ukraine rather than the country where the bonds were issued. “The Ukrainian judiciary demonstrated its ability to protect the rights of foreign investors,” Cherniavsky said.
According to Volodymyr Igonin, lawyer at Kyiv-based Vasil Kisil and Partners law firm, the Mriya case was a de facto precedent and its experience overcoming massive debt would be employed by other creditors in the future.
Despite this small victory, Alexander Paraschiy, research director at Concorde Capital, said Mriya’s experience was unlikely to have any positive outcome for its creditors. He noted that Ivan Huta, the previous owner, recently established a new agricultural company in Ternopil Oblast called Agrarnaya Horodnitsa.
“Most agroholdings are comprised of small collective farms, and by virtue of Ukrainian laws, they can only hold lease rights on farmland. With his power in Ternopil, Huta is able to pull those rights from Mriya in favor of his new agro-company, and Mriya will lose its land bank,” Paraschiy said.
Creative bankruptcy
Amid the Mriya crisis, another shock followed up in 2015. One of the leading agricultural processing holdings in Ukraine, Kirovohrad-based Creative Group, was involved in a well-documented forgery. In July 2015, Creative Group was acquired by several investors. An audit revealed falsifications in accounting and collateral documents used for borrowing from banks. As one of the owners Rysbek Toktomushev said, this “massive historic fraud” prevented them from restructuring the debt. In June, they filed for bankruptcy.
“Because of the accounting fraud the actual debt is totally disproportionate to the real income and real asset base of the company: the numbers just don’t stack up.” Toktomushev told the Kyiv Post. “The previous owners pictured income and assets for collateral coverage that had never existed or been far less.”
Since the fall of 2015, Creative managed to decrease its debt from more than $700 million to $545 million. The major lenders are state-owned Oschadbank ($313 million), UkrEximBank ($109 million), private VTB Bank ($18 million) and Greek-based Piraeus Bank ($15 million).
According to Toktomushev, $74 million debt to the syndicate of European banks, led by UniCredit Bank, was bought out by an investment group whose identity he didn’t disclose. Kernel Group, another giant agrobusiness in Ukraine, acquired an oil-extracting plant Ellada, and thus bought out Creative’s $95.8 million debt to UkrGazBank.
“Our intention now is to claim damages from the previous shareholders. Also, as the banks foreclose the production assets, our intention is to buy sound production assets back at auctions,” said Toktomushev.
Paraschiy of Concorde Capital said that many Ukrainian agrocompanies tended to abuse international accounting standards. They either overreport expected crop yield and market prices and show high operational revenues from unharvested crops.
Or they conceal from their financial statements some of their assets with large debts, like it was in Mriya; or, as it happened with Creative, they document overestimated or even non-existent assets as collateral for bank loans.
UkrLandFarming’s uncertain future
Lately all eyes have been on UkrLandFarming, the largest agricultural holding, which controls 670,000 hectares of land. Not so long ago it was expected to go public, but cancellation of tax relief and economic recession hurt business. In addition, two banks – VAB and Financial Initiative – that belonged to its owner Oleg Bakhmatiuk went bankrupt in 2015. The NBU filed five lawsuits against Bakhmatiuk, who acted as the guarantor for his banks’ loans, to recover debt worth Hr 10.9 billion ($419 million) and had his property frozen by the court approval. He also owes Hr 5.3 billion to the state banks.
“The NBU will take all measures within Ukrainian law to recover the debt on refinancing loans from the insolvent banks at the stage of liquidation, as well as from their sureties,” the NBU press service said. The central bank claimed that Bakhmatiuk was using “semi-legal methods to evade its liabilities, such as foot-dragging on legal processes.”
Bakhmatiuk, in turn, accused the NBU and its governor, Valeria Gontareva, of attempting to destroy UkrLandFarming.
In October, Bakhmatiuk told Interfax-Ukraine that he was ready to sell the company over the conflict with the NBU. Earlier in April, UkrLandFarming reported successful talks with Deutsche Bank, Russian Sberbank and Eurobond holders on restructuring more than a half of its $1.7 billion debt.
Bakhmatiuk is under criminal investigation now. He could not be reached for comment.
Alexander Paraschiy doubted that Mriya’s scenario would work for UkraLandFarming.
“First, Mriya Plc. was officially registered in Cyprus, while most of the assets of UkrLandFarming are registered in Ukraine. This means foreign creditors will have to litigate in Ukraine. Second, we can witness how difficult it is to litigate with Bakhmatiuk – the NBU has won some lawsuits against him, but the court decisions aren’t being executed for some reasons,” he said.
The resolution of these disputes to a large extent depends on debtor companies’ ability to negotiate with their creditors as well as relies on compliance with legislation and execution of the judicial orders.
Volodymyr Igonin of Vasil Kisil & Partners said that Ukrainian legislation on debt restructuring is inadequate. Still, the Ukrainian legal framework is being changed to comply with a common business practice of the developed markets.
Comprehensive legal due diligence provides a prospective lender with an understanding of the company’s assets and liabilities, as well as available collateral for loan repayment. The high level of implemented corporate governance can be another institutional safeguard from wrongdoings of the management and particular owners.
“Our practice shows that strategic creditors may recommend or even insist on implementation of the best practice of corporate governance (e.g. a powerful supervisory board with independent directors, risk-management procedures, transparent reporting etc.) in a borrowing company as a condition to granting it a substantial loan,” said Igonin.
